Dec. 10 (Bloomberg) -- At a benefit for pediatric cancer
care in London three weeks ago, Carson Block, the 36-year-old
short seller whose research helped erase almost $7 billion of
market value in China since 2010, unveiled his latest theory.

Olam International Ltd., the government-backed commodity
merchant in Singapore responsible for 90 percent of the world’s
peanut trade, is a sham in the image of Enron Corp. and doomed
to fail, Block said. Within minutes, its U.S.-traded shares
began a plunge of more than 20 percent. Two days later, Olam
filed suit, calling the statements slanderous.

None of it is new for the founder of Los Angeles-based
Muddy Waters LLC, who said he stopped trying to bet against
Chinese companies this year after government agents hindered his
analysts and harassed workers at a storage company he owns in
Shanghai. “Tattooed gangsters” came looking for him, he wrote
in an e-mail to Bloomberg on Dec. 4, retaliation for his success
uncovering financial sleight of hand at companies such as Sino-Forest Corp., which is now bankrupt.

“Block has been the most vocal and public about the
accounting problems with U.S.-listed Chinese companies,” said
Timothy Ghriskey, chief investment officer at New York-based
Solaris Group LLC, which manages about $2 billion and sold
positions in China last year. “To give him credit, it is
certainly providing a service to investors by highlighting this
issue and saying it is something that needs to be dealt with.”

SEC Enforcement

A lawyer who grew up in Summit, New Jersey, Block co-wrote
“Doing Business in China for Dummies” in 2007, telling readers
“you may face some of the most brutal negotiations you’ve ever
seen” and “it’ll likely be very rewarding in the end.”

Now he’s switching his focus from the world’s most-populous
country just as the U.S. Securities and Exchange Commission
steps up scrutiny of companies there. In a Dec. 3 enforcement
action, the commission accused affiliates of the four biggest
accounting firms of refusing to produce documents for
investigations into client financial disclosures.

While the SEC has been raising questions about Chinese
companies with listings on American exchanges for at least seven
years, it wasn’t until Muddy Waters started publicizing its
research that investors began to understand the risks. Block has
been likened to a “shock-jock” by Allen Chan, the co-founder
and former chief executive officer of tree-plantation operator
Sino-Forest, and Olam CEO Sunny Verghese said his goal is to
“create panic.” To his clients and peers, Block is a hero.

‘Important Function’

“Short sellers perform an important function in the
marketplace, especially those who share their views with the
public,” said David Rocker, former general managing partner of
hedge fund Rocker Partners LP, which averaged an 11 percent
annual return between 1985 and 2006 with bearish bets. “I
applaud Block’s courage in presenting his views in the face of
considerable hostility.”

Critical reports by Muddy Waters LLC drove down the shares
of eight companies by an average of 60 percent, according to
data compiled by Bloomberg. Now it’s pressing the case against
Olam, whose second-biggest holder is state-owned investment
company Temasek Holdings Pte. and has a market capitalization of
S$3.49 billion ($2.86 billion).

Olam’s Singapore-traded shares lost 16 percent since Nov.
19, the day Block first made his allegations at the Ira Sohn
Investment Conference, through the end of last week. The
commodity trader brought its rebuttal to court. The stock rose
1.4 percent to S$1.48 today.

Short Lehman

At the annual gathering, the same one where hedge-fund
manager David Einhorn said in 2008 he was short Lehman Brothers
Holdings Inc. before it filed the largest bankruptcy in U.S.
history, Block presented his bearish thesis on the commodity
trader using an Enron logo with letters replaced to say Olam.

Enron, once the world’s largest energy trader, sought
chapter 11 protection in December 2001 after revelations that
the Houston-based company used off-balance-sheet vehicles to
hide billions of dollars in losses and inflate the company’s
stock price. More than 5,000 jobs and about $1 billion in
employee retirement funds were wiped out.

“Comparisons to Enron are overused, but in the case of
Olam, the similarities really are uncanny,” Block wrote a week
after the conference. “We believe that the single biggest
factor in Enron’s collapse was its use of accounting techniques
similar to Olam’s value gains.”

‘Burning Cash’

Muddy Waters says Olam should be considered on a
“liquidation basis because our opinion is that it is likely to
fail,” the Nov. 26 report said. The company uses non-cash
accounting gains to boost earnings, has been “burning cash”
and will need to raise or refinance as much as S$4.6 billion of
debt over the next year to remain solvent, Block’s firm said.
CEO Verghese dismisses the claim, pointing to more than S$10
billion of balance-sheet liquidity.

Hung Hoeng Chow, Olam’s associate general manager of
investor relations, declined to comment for this story.

Block said he doesn’t expect his work on Olam to elicit the
same hostility he was subject to in China.

“We do not believe that Singapore is a thugocracy,” he
wrote to Bloomberg News last week. “If Singapore did use heavy-handed retaliatory tactics against us, that would certainly be a
surprise.”

Block, a self-described gangster rap enthusiast who usually
declines to say where he’s calling from, grew up in the equity
research business, working as an analyst in college and passing
his broker’s license exam at 19. His interest in Asia started
when he spent a summer in Japan during high school. He first
went to Beijing in 1997 and moved to Shanghai after graduating
from the University of Southern California in Los Angeles with a
degree in business administration in 1998.

Law Degree

His plan to do equity research in China fizzled in 1998. In
2005, with a law degree from Chicago-Kent College of Law, he
returned to Shanghai to work on foreign direct investment and
merger deals at the law firm Jones Day. He quit in 2006,
planning to start a private banking business in Singapore, and
ended up founding Love Box Self Storage instead.

Pressure is mounting for Muddy Waters to repeat its early
success after its most recent targets failed to turn a profit.
Beijing-based Fushi Copperweld Inc., a maker of copper-clad
metal wire that Block said in April may be committing fraud, has
gained 25 percent in New York this year after China Development
Bank Corp. offered funding for the company to buy back its
shares.

Focus Media

Focus Media Holding Ltd., the Shanghai-based advertising
firm that Block claims overstated its network, posted a 24
percent gain in its American depositary receipts this year. The
company is the subject of a $3.5 billion buyout offer by a group
of private equity firms including Carlyle Group LP. The deal, if
completed, would be China’s largest leveraged buyout.

“His research is extremely poor,” said Louis Hsieh,
president of New Oriental Education & Technology Group Inc.,
another Block short. “His latest contention is that he’s
backing away from Chinese companies because the Chinese
government is in conspiracy with Chinese companies to commit
accounting fraud against U.S. investors. What’s the basis for
that? It’s ludicrous.”

The American depositary receipts of the Beijing-based
company are up 20 percent since Block’s report, the only stock
among his eight sell ratings to have a positive performance
since he began publishing on them.

‘Somewhat Painful’

Block says the government is protecting frauds by making it
difficult to research short sale candidates, as he did with his
biggest target to date, Sino-Forest. The shares slumped 74
percent before Sino-Forest eventually filed for bankruptcy.

The Chinese government has used intelligence and police
agencies, including the Ministry of State Security and the
Public Security Bureau, to deter Muddy Waters from continuing to
do research in China, Block told Bloomberg News last week.

“The security service intervention in China has been
somewhat painful on a personal level for Muddy Waters’ team
members, our family members, and myself,” he wrote.

Calls to the Ministry of Public Security’s listed phone
number weren’t answered, and it did not immediately respond to
an inquiry sent by fax. A staff member answering the Ministry of
State Security’s listed number said the ministry did not have a
phone or fax number to handle media queries, and that all
inquiries are to be sent by post.

Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming
LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs
Ltd. have refused to cooperate with accounting investigations
into nine companies whose securities are publicly traded in the
U.S., the SEC said in an administrative order on Dec. 3. BDO
China Dahua Co. was also named in the action.

Orient Paper

Block hunted smaller game when he started. His first short
was Baoding, Hebei-based Orient Paper Inc. with a market value
of about $160 million. Block visited the company with a friend,
Sean Regan, observed dilapidated machinery and a factory full of
steam, according to a Bloomberg News interview in September.
When the CEO couldn’t answer questions about production, they
realized the company was ripe to bet against.

“The Carson Block model of very detailed reports has set a
new standard,” Sahm Adrangi, who manages $125 million at New
York-based hedge fund Kerrisdale Capital Management LLC., said
in a phone interview. “His original piece on Orient Paper was
breathtaking and unprecedented with respect to anything short
sellers had done in terms of writing and sharing research.”

Orient Paper fell 40 percent in the four days after Block
on June 28, 2010, described its purpose as being “to raise and
misappropriate tens of millions of dollars” and accused it of
overstating 2009 revenue by 40 times. The company said in 2011
that a four-month investigation found no evidence to support
Block’s allegations. The stock has retained its listing on the
New York Stock Exchange, where it has lost 78 percent since the
Muddy Waters report.

Regulatory Scrutiny

“Prior to the first report I had no idea that anybody
would care,” Block said in a June 2011 interview with Bloomberg
News. “Every single report from then on was with the
expectation and the hope that I would be talking to regulators
to help them figure this out. I’m confident that my actions
stand up to regulatory scrutiny.”

Rino International Corp. was next. In a November 2010
report Muddy Waters said that the Chinese designer of wastewater
equipment had exaggerated sales. Rino, based in Dalian, China,
said in a filing eight days later that two years of financial
statements weren’t reliable. The shares tumbled 67 percent that
month in U.S. trading and the stock is now trading for 2 cents a
share over the counter.

Revenue Reporting

Ben Wang, Rino’s chief financial officer, didn’t respond to
two calls and an e-mail asking for comment on the report by
Muddy Waters, while an e-mail to Orient Paper went unanswered.

Except for Sino Forest and Olam, where the SEC didn’t have
jurisdiction, the regulator had commented on accounting matters
in each of his short selling targets before Block’s reports. The
commission pointed to concerns about revenue reporting at New
Oriental Education & Technology in 2009 and lack of clarity in
the financial results of Rino going back to 2008.

SEC spokesman John Nester didn’t return an e-mail seeking
comment on the regulator’s response to fraud among U.S. listed
Chinese companies.

“Block is in the intelligence business where you gather
tidbits of information, you fuse them together, connect the dots
and then you draw a conclusion,” James Rickards, senior
managing director of Tangent Capital Partners in New York, said
in a phone interview. He advises clients investing in China.
“The SEC is much more like cops. First the crime is committed,
and then they go to solve the crime. But Block is looking at the
crime in progress.”

John Paulson

Muddy Waters followed its first reports with bets in 2011
against China MediaExpress Holdings Inc. and Duoyuan Global
Water Inc., which were both delisted in the U.S. The streak
culminated in June with Sino-Forest, which had a market value of
about C$6 billion ($6.1 billion) and counted hedge fund manager
John Paulson among its biggest shareholders.

Block, who speaks some Mandarin, called the Hong Kong and
Mississauga, Ontario-based company a Ponzi scheme after he had
10 researchers spend two months looking at the business to
produce a 40-page report, which was supported by at least five
follow-up notes with documentation.

Now he is trying to repeat the success by applying his
research skills in the case against Olam, a company that counts
AllianceBernstein LP and BlackRock Inc. among its shareholders.

“The view of short sellers, if accurately and fairly
presented, provides a balance to the investing public who would
otherwise be exposed to only positive news from an array of
bullishly oriented constituencies,” David Rocker said.